On March 3, 2012, Economist and Columnist Paul Krugman writes in The New York Times:
A followup on the effects of austerity at the state and local government level, which have led to a decline in government purchases of goods and services that stands in stark contrast to earlier recoveries. I pursued this a bit more, and have a startling calculation to offer.
Let’s look at the comparison between government purchases in the Reagan “Morning in America” recovery and the current recovery:
At this point in the Reagan recovery government spending had risen 11.6 percent; this time around it’s actually down by 2.6 percent. So if we had followed the Reagan track, spending would be almost 15 percent higher.
Since government spending on goods and services is about $3 trillion a year, spending on the Reagan track would have meant more than $340 billion more in direct government demand, or more than 2 percent of GDP. Include the multiplier effect, and we would have expected real GDP to be something like 3 percent higher — and given Okun’s Law, the unemployment rate to be 1.5 percentage points lower, or something like 7 percent.
How does this compare with the Reagan recovery at a corresponding stage? Hmmm:
So what my calculation suggests is that if it weren’t for austerity, American style — the result of the failure to provide sufficient aid to state and local governments — we might well have an unemployment rate right now that was lower than unemployment at the comparable stage of “Morning in America”.
http://krugman.blogs.nytimes.com/2012/03/03/reagan-obama-austerity/?smid=fb-share
